July 25, 2013

Structural Shifts, BigLaw, and the Economic Value of a Law Degree

Simkovic and McIntyre’s article, Economic Value of a Law Degree, has received enormous
attention. Previous Legal Ethics Forum
posts on it can be found here,
here
and here. I
learned a great deal from the article and find both its analysis and
conclusions compelling. Most of the criticisms
of the article that I have seen mischaracterize the methodologies used by
Simkovic and McIntyre or focus on ancillary issues that could be the subject of
future research.

I do have one concern about the article’s analysis, however. Although I am ultimately sympathetic to the
authors’ view that we have yet to see clear evidence of a structural shift in
the legal services market, contra
Simkovic and McIntyre, I do not believe that the size of the earnings premium
currently enjoyed by JD holders undermines the structural shift thesis.

My view on this point follows from one of the key findings
of the article: The earnings premium of JD holders increased during the recent
recession. Simkovic and McIntyre do not
seek to explain this phenomenon and merely suggest that, as difficult as the
economy was for JD holders, it was even more difficult for those without
advanced degrees. While
most industries used the last recession to “rightsize”, however, large law firms retained
far more lawyers than needed to meet the demand for their services. Both the Georgetown/Peer
Monitor Report and Citi/Hildebrandt
Client Advisory recently noted the extent
to which BigLaw continues to be plagued by excess capacity.

BigLaw’s behavior during the recession helps to explain why
employment for lawyers has been more robust than for the overall economy and
why Simkovic and McIntyre found that JD holders earned a larger earnings
premium from 2008-2011 than they did from 2004-2007. A contributing factor may be that BigLaw
generally provided laid off attorneys with generous severance packages and
assisted them in finding alternative employment. If the foregoing is true, the large earnings
premium observed from 2008-2011 may mask underlying weaknesses in the legal
market.

One might wonder how BigLaw could still be suffering from
excess capacity after the widespread Lathaming
of associates in 2008 and 2009. The
answer is that many firms cut their associate ranks significantly, but comparatively few
partners were terminated (some were demoted). I previously discussed this point here.
There are many possible explanations as
to why law firms did not cut more deeply: Loyalty to longtime colleagues, a mistaken
belief that the recession would be short in duration, or an inability to
foresee alleged structural shifts in the legal services market such as the rise
of LPOs
and technologies such as predictive
coding. Whatever the case, if demand
for high-end legal services continues to stagnate as law firm leaders have predicted,
we should anticipate further layoffs,
not a substantial uptick in entry-level hiring.

While BigLaw has experienced ebbs and flows in the past,
BigLaw generally did very well from 1996-2011, the time period studied by
Simkovic and McIntyre. Indeed, the Citi
/Hildebrandt Advisory characterizes 2001-2007 as “boom years” and notes that
year-to-year growth in profits were also much more robust from 1992-2001 than they
have been since 2008. I do not
agree with Brian
Tamanaha that the authors should have used a larger data set, but their results
may have been buoyed by a different BigLaw than exists today.

BigLaw is obviously not the entire legal industry, and its recent
troubles do not necessarily portend the struggles of JD holders generally. But BigLaw employs many of the individuals
who are in the top quarter of JD earners, and its alumni often have very lucrative
careers as well. Unless hiring increases
significantly at large law firms in the near future, a significantly smaller
percentage of JDs will find them themselves in these well-paid positions than
in the past. This along with a steadily
improving general economy will cause the earnings premium enjoyed by JDs to shrink
in coming years. The structural change
thesis will then seem more plausible, and law school will be a somewhat riskier
investment than Simkovic and McIntyre claim.

Comments

Structural Shifts, BigLaw, and the Economic Value of a Law Degree

Simkovic and McIntyre’s article, Economic Value of a Law Degree, has received enormous
attention. Previous Legal Ethics Forum
posts on it can be found here,
here
and here. I
learned a great deal from the article and find both its analysis and
conclusions compelling. Most of the criticisms
of the article that I have seen mischaracterize the methodologies used by
Simkovic and McIntyre or focus on ancillary issues that could be the subject of
future research.

I do have one concern about the article’s analysis, however. Although I am ultimately sympathetic to the
authors’ view that we have yet to see clear evidence of a structural shift in
the legal services market, contra
Simkovic and McIntyre, I do not believe that the size of the earnings premium
currently enjoyed by JD holders undermines the structural shift thesis.

My view on this point follows from one of the key findings
of the article: The earnings premium of JD holders increased during the recent
recession. Simkovic and McIntyre do not
seek to explain this phenomenon and merely suggest that, as difficult as the
economy was for JD holders, it was even more difficult for those without
advanced degrees. While
most industries used the last recession to “rightsize”, however, large law firms retained
far more lawyers than needed to meet the demand for their services. Both the Georgetown/Peer
Monitor Report and Citi/Hildebrandt
Client Advisory recently noted the extent
to which BigLaw continues to be plagued by excess capacity.

BigLaw’s behavior during the recession helps to explain why
employment for lawyers has been more robust than for the overall economy and
why Simkovic and McIntyre found that JD holders earned a larger earnings
premium from 2008-2011 than they did from 2004-2007. A contributing factor may be that BigLaw
generally provided laid off attorneys with generous severance packages and
assisted them in finding alternative employment. If the foregoing is true, the large earnings
premium observed from 2008-2011 may mask underlying weaknesses in the legal
market.

One might wonder how BigLaw could still be suffering from
excess capacity after the widespread Lathaming
of associates in 2008 and 2009. The
answer is that many firms cut their associate ranks significantly, but comparatively few
partners were terminated (some were demoted). I previously discussed this point here.
There are many possible explanations as
to why law firms did not cut more deeply: Loyalty to longtime colleagues, a mistaken
belief that the recession would be short in duration, or an inability to
foresee alleged structural shifts in the legal services market such as the rise
of LPOs
and technologies such as predictive
coding. Whatever the case, if demand
for high-end legal services continues to stagnate as law firm leaders have predicted,
we should anticipate further layoffs,
not a substantial uptick in entry-level hiring.

While BigLaw has experienced ebbs and flows in the past,
BigLaw generally did very well from 1996-2011, the time period studied by
Simkovic and McIntyre. Indeed, the Citi
/Hildebrandt Advisory characterizes 2001-2007 as “boom years” and notes that
year-to-year growth in profits were also much more robust from 1992-2001 than they
have been since 2008. I do not
agree with Brian
Tamanaha that the authors should have used a larger data set, but their results
may have been buoyed by a different BigLaw than exists today.

BigLaw is obviously not the entire legal industry, and its recent
troubles do not necessarily portend the struggles of JD holders generally. But BigLaw employs many of the individuals
who are in the top quarter of JD earners, and its alumni often have very lucrative
careers as well. Unless hiring increases
significantly at large law firms in the near future, a significantly smaller
percentage of JDs will find them themselves in these well-paid positions than
in the past. This along with a steadily
improving general economy will cause the earnings premium enjoyed by JDs to shrink
in coming years. The structural change
thesis will then seem more plausible, and law school will be a somewhat riskier
investment than Simkovic and McIntyre claim.